Navy To Pay Maine Shipbuilder's Overruns

December 07, 1989|By The Boston Globe

WASHINGTON — In a move that could force it to bear billions of dollars in extra costs, the Navy has quietly agreed to pay Bath Iron Works for most of its cost overruns on a shipbuilding program that had been touted as part of the government's get-tough policy with fast-spending defense contractors.

A Navy lawyer labeled the agreement "admittedly highly unusual." Congressional critics say it could force the government to pay much of the tab for more than $3 billion in overruns on other shipbuilding programs that, like Bath's, were set up to avoid such a result by requiring contractors to bear most extra costs.

The Navy agreed to the payments only after Bath said it might not be able to finish the guided missile destroyer without the extra money, and after Navy officials warned in internal documents that Bath was in financial trouble because of heavy debt incurred during a 1986 leveraged buyout of the big Maine shipbuilder.

Although documents show that neither Bath nor Navy officials could figure out exactly what caused the overruns at the Maine shipyard, which date back several years, the two sides agreed that most of the extra money had been spent trying to devise "stealth" technology to make the 8,300-ton ship hard to detect by radar.

It had not been generally known the Navy was trying to use stealth technology, which gained public prominence earlier this year when the Air Force unveiled its eerie, bat-like B-2 bomber. The idea of hiding an object as large as a ship from radar was greeted with derision Wednesday by some defense analysts.

Since winning the contract to design and build the first of the new destroyers in April 1985, the vessel's price tag has almost doubled to more than $530 million. Congressional critics say the latest increase raises the price as much as $90 million and assures Bath, which would have otherwise lost money, of an $11 million profit.

Neither Bath nor the Navy would say exactly how much extra the government has agreed to pay.

"I think the Navy and the contractors are trying to hoodwink us," Rep. John D. Dingell, D-Mich., wrote in a recent letter to a congressional colleague. "It was the taxpayers who took a bath on this bailout," he said.

Dingell, whose hearings on exorbitant military equipment prices have repeated embarassed the Pentagon, said the Navy destroyer program "appears to be a prime candidate for ... cancellation."

In a statement late Wednesday, the Navy asserted that the Bath agreement would not set a precedent for other shipyards which suffer cost overruns. However, the claim was greeted with considerable skepticism by critics and analysts.

Meanwhile, Bath chairman William E. Haggett denied that the shipyard is in financial trouble and asserted that the Navy owes it all the additional money it is being paid.

Haggett refused to give details of what had caused the extra costs, but he suggested they were incurred in adding stealth technology to the ship.

"That issue (stealth) has been the issue that has made this whole thing so difficult," Haggett said. "You just jumped into a classified area and I just can't talk about it as much as I'd like to," he said.

As they have before, Navy officials said that when finally outfitted with weapons and radar, the vessel being built by Bath will still be within its original $1.1 billion budget.

Neither Haggett nor Navy officials could say how much the addition of stealth added to the cost. He said without extra money "the completion of the (ship) is in jeopardy and the impact on follow ship programs could be immense."

Haggett's warning fanned Navy concerns that Bath was in financial trouble, a fear Navy officials had voiced late last year when they were deciding whether to award the Maine shipyard contracts for an additional three ships.

It is understood that the Navy hired outside analysts who discovered the shipyard had almost $620 million in long-term debt and tax liabilities, in large measure because of its 1986 leveraged buyout by a partnership headed by Prudential Insurance Co.

In leveraged buyouts, companies are acquired with money borrowed against the targets' own assets and often leave the resulting firms laden with debt.

Navy officials would not award Bath the additional ship contracts until its new owners agreed to cut the company's debt by several hundred million dollars and secure additional lines of credit to make sure it could complete the contracts. Haggett said the financial restructuring was finished earlier this year.

The Navy has more than 40 similar contracts, according to the General Accounting Office. Some 25 are suffering cost overruns totalling about $3.3 billion.